BIS Warns Central Banks: Don't Be Alarmed by Middle East Conflict — Energy Surge May Be Short-Term Impact

How do the lessons from 2022 influence current central bank decisions?

Cailian Press, March 17 (Editor Zhao Hao) The Bank for International Settlements (BIS) urges policymakers at central banks not to overreact to Middle East conflicts, calling this a “textbook” case: when the shock may be only temporary, central banks should choose to “ignore its impact.”

The BIS, headquartered in Basel, Switzerland, is known as the “central bank of central banks,” primarily responsible for promoting international monetary and financial cooperation.

So far this month, international oil prices have risen about 40%, and wholesale natural gas prices have surged nearly 60%, reminiscent of the situation in 2022 when the Russia-Ukraine conflict erupted alongside a global economic restart, jointly driving inflation higher.

Subsequently, many major central banks around the world raised benchmark interest rates to levels not seen in decades. The Federal Reserve, European Central Bank, and others faced widespread criticism for being too slow to respond, keeping inflation high.

This time, financial markets have quickly adjusted expectations, betting that central banks will not repeat the same mistakes. However, the BIS in its latest report warns all parties to remain cautious.

Hyun Song Shin, BIS economic adviser, said, “If this is a supply shock, especially a temporary one, then according to textbook principles, central banks should choose to ‘look through’ this shock rather than react with monetary policy.”

Shin added that recent rapid changes in market interest rate pricing (with external expectations that the Fed will only cut rates once this year and that the ECB will hike rates in the second half) reflect, to some extent, vivid memories of 2022.

“This is somewhat like a conditioned reflex,” Shin pointed out. Currently, key inflation indicators in Europe and the US have not shown the same magnitude of change, making the overall situation appear “very chaotic.”

The BIS report also mentions other market fluctuations this year, including sharp sell-offs in some AI-related stocks and pressures in the private credit market.

Frank Smets, deputy head of BIS’s Monetary and Economic Department, said, “We need to keep an eye on these developments, but so far, we haven’t seen any major market disorder.”

(Cailian Press, Zhao Hao)